“Conflict Minerals” has been a hotly debated topic for some time, but most recently given the last minute provision was included as Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Final Rule). This legislative provision was profound in nature, representing a legislative avenue through the use of economic levers to attempt to address what many suggest1 is a national security issue. The provision’s mandate to the Securities and Exchange Commission (SEC) to finalize an implementation rule requiring publicly listed companies to implement due diligence measures to determine source and chain of custody of defined minerals used in their products introduced into the stream of commerce represents an emerging movement towards increased transparency in corporate business practices.
From our discussions with companies that began during the SEC’s rulemaking process, to our ongoing efforts in assisting companies with compliance, this is really hard! We see the real challenges companies are facing in developing compliance programs to be prepared for the first filing due in May of 2014, including: availability and quality of information necessary to undertake due diligence, gathering of compliance information, complexities of supply chains, risk assessment, resource availability, and cost-effective implementation.
I’d like to offer a few observations around this topic broadly. As a leading professional services organization, we, at Deloitte2, bring an informed perspective to regulatory compliance and are in the business of assisting our clients in complying with federal securities regulations.
The “wait and see” approach is likely not a recipe for success as it relates to this requirement. One of the marketplace realities serving to disincentivize companies from focusing on this requirement – the legal action brought against the SEC in late October by the Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable around the cost benefit considerations of the Final Rule – was rejected in the U.S. District Court on July 23, 2013. With this development, the “wait and see” approach we’ve seen many companies take to putting in place a conflict minerals compliance program to date is changing rapidly. Although the plaintiffs have until August 22, 2013 to appeal, it may take a few months for the appellate court to conclude; in which case if the appellate court agrees with the U.S. District Court, companies who choose to continue to “wait and see” may lose precious time needed to implement a suitably robust due diligence process. Getting started is key, even with the potential of an appeal and the understanding that additional guidance may be planned from the SEC in the near term.
Global developments continue to emerge around this topic, with governments around the world following the Final Rule’s provisions and marketplace implications very closely. On March 26, 2013, a bill3 was introduced in Canada that would require Canadian companies to exercise due diligence with respect to conflict minerals sourced from the Great Lakes Region of Africa. Under the bill, which is similar to the Final Rule, regulated companies would be required to “exercise due diligence in respect of any extraction, processing, purchasing, trading in or use of designated minerals that it carries out in the course of its activities, or that it contracts to have carried out.” Companies that have, “processed, purchased, traded in, used or extracted a designated mineral, or contracted to do so”, must, within 60 days after the end of that fiscal year, submit to the Minister of Foreign Affairs and publish a report and certain other information on its website. Additionally, a public consultation on a possible European Union (EU) initiative on responsible sourcing of minerals originating from conflict-affected and high-risk areas was issued with a comment period that concluded on June 26, 20134. The aim of this consultation was to get interested parties' views on a potential EU initiative for responsible sourcing of minerals coming from conflict-affected and high-risk areas. The Commission will use the results to help it decide whether – and how in a reasonable and effective manner – to complement and/or continue on-going due diligence initiatives and support for good governance in mineral mining, especially in developing countries affected by conflict. These two developments are specific examples of the emerging global trend which also includes efforts underway or under consideration by Australia, the United Kingdom and other countries. These global developments further emphasize the importance for U.S. publicly listed companies to recognize this growing trend as further reinforcement of the reality of this compliance requirement and the need for a comprehensive approach to compliance.
Compliance program development with an emphasis on governance should be considered a primary focus for companies as they approach this requirement. Given the nature of this requirement, companies recognize the need to engage representatives from multiple areas of the organization. As a part of convening critical leaders, it is important to clearly define responsibilities and obligations of each representative and the governance and oversight mechanisms necessary to effectively communicate the potential brand and reputational exposure of program execution and related disclosures. Each representative brings an important perspective and contribution to the process that will need to be viewed beyond just a ‘check-the-box’ representation as companies work toward a filing with the SEC signed by an executive officer.
What Next: As leading practices around conflict minerals compliance approaches continue to emerge, along with anticipated additional guidance from the SEC, companies will begin to organize around practical implementation measures in the execution of a compliance program. It’s clear that this move toward increased transparency and accountability for companies to take responsibility for risks throughout their operations and supply chain is not likely to slow down anytime soon, so companies should consider taking a comprehensive and reasonable approach.
Deloitte & Touche LLP
1 The Congo conflict has been an issue raised in the United States Congress for a number of years. For example, in the 109th Congress, then-Senator Sam Brownback, along with Senator Richard J. Durbin and then-Senator Barack Obama, among others, co-sponsored S. 2125, the Democratic Republic of Congo Relief, Security, and Democracy Promotion Act of 2006. See Pub. L. 109-456 (Dec. 22, 2006) (stating that the National Security Strategy of the United States, dated September 17, 2002, concludes that disease, war, and desperate poverty in Africa threatens the United States’ core value of preserving human dignity and threatens the United States’ strategic priority of combating global terror).
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